China’s call for ‘core technology’ breakthrough belies its weakness in semiconductors
Without US-made chips, software and other equipment, ZTE will be under pressure to meet its global network equipment and smartphone orders, as well as maintaining the momentum of its 5G-related research and development
China’s hi-tech industry may need to stay the course in investing in crucial technologies, which may not result in near-term profits, in a bid to help lessen the country’s dependence on imported semiconductors, software and other resources.
This has come to the fore as ZTE Corp, China’s largest listed telecommunications equipment maker, fights for its survival amid a US government ban on the export of American-made chips and other components to the company.
“Quickly earning money is a trend among many Chinese entrepreneurs. We have seen many original equipment manufacturers in China earn easy money by building products that do not require sophisticated technologies,” said Li Yi, chief fellow at the Shanghai Academy of Social Sciences.
“Many of these entrepreneurs bail out on making huge long-term investments in industrial design and advanced manufacturing.”
Such short-term approach has partly negated recent government investments as well as strategic mergers and acquisitions in major segments of the domestic hi-tech industry, particularly in semiconductors.
China has remained heavily dependent on the import of semiconductors, accounting for more than 60 per cent of annual global chip sales, according to data from PwC. Semiconductors represent one of the top exports of the US, along with aircraft, refined oil and cars.
That state of affairs has come to bite ZTE after the US government imposed a seven-year ban on exports of American-made parts to the Shenzhen-based company, which failed to discipline 35 employees involved in sanctions-busting trade with Iran.
Without US-made chips, software and other equipment, ZTE will be under pressure to meet its global network equipment and smartphone orders, as well as maintaining the momentum of its 5G-related research and development.
While the processors made by the US companies are mostly used in upscale electronic products, the China-made ones can only fill the low-end market for products such as bank cards and USB keys.
It is a situation that has prompted China’s prominent internet industry leaders to call for a sharpened focus on domestic innovation.
Jack Ma Yun, the founder and executive chairman of Alibaba Group Holding, said on Sunday that China needs more companies to play a big role in major technology developments to boost the country’s competitiveness.
“It is the compelling obligation for big companies to compete in core technology,” Ma said during the first Digital China Summit in Fuzhou. “A real company is not determined by its market value or market share, but how much responsibility it takes and whether it has mastered core and key technologies.”
Alibaba, parent of the South China Morning Post, last week took over chip design firm Hangzhou C-Sky Microsystems, marking the e-commerce giant’s first acquisition in the sector after previously making investments in several chip companies. Alibaba’s investments follow its expansion initiatives in artificial intelligence, cloud computing and the Internet of Things.
At the same event in Fuzhou, capital of the southeastern province of Fujian, Tencent Holdings chairman Pony Ma Huateng said it has become urgent for Chinese companies to pursue breakthroughs in core technology.
Core technology is an important tool for the nation, President Xi Jinping said during a national conference on network security and information on Saturday. “We must keep persevering … and accelerate core technology breakthrough in the information field,” he said.
In the US, Google parent Alphabet has invested in plenty of moon shot projects that are long-term investments, such as Project Titan – for high-altitude, solar-powered internet-delivering drones.
Alibaba last year pledged to spend more than US$15 billion in research and development through its Alibaba Damo Academy, which will bankroll frontier research like quantum computing.
The Shanghai Institute of Fog Computing Technology represents another example of China’s investments into advanced sciences, including artificial intelligence and quantum computing. It is finding ways to speed up data transmission by enabling devices to communicate with each other locally, rather than route that conversation through a centralised cloud environment.
“Investing in technology is just one part of the puzzle; investment in compliance is also key,” said Paul Haswell, a partner who advises technology companies at the international law firm Pinsent Masons. “ZTE’s issues haven’t arisen because of any failure on ZTE or China’s part in owning vital technology.”
No Chinese semiconductor company has been able to crack the world’s top 20 ranking in terms of sales, which are dominated by companies from the US, Japan, South Korea and western Europe.
Three Taiwanese firms – Taiwan Semiconductor Manufacturing Company, MediaTek and United Microelectronics Corp – were among those in the top 20, according to IC Insights.
Intel, Broadcom and Qualcomm, the US suppliers of chips for smartphones and computers, are at least 10 times the market value of China’s biggest chip company Shenzhen Huiding Technology, which has a market capitalisation of US$7.7 billion, according to Bloomberg data.
US chip giant Intel Corp, with sales of US$62.7 billion last year, has not included any Chinese company in its recent lists of top quality suppliers last year and this year.
Still, China’s chip industry has become closer to the world’s first-tier as domestic-made chips are now being used in many industries, according to Diao Shijing, the director of information technology at the Ministry of Industry and Information Technology.
Li, from the Shanghai Academy of Social Sciences, credited Huawei Technologies for producing Kirin, its own chipsets for smartphones.
“Kirin may not be the best chip set available in the market, but it could guarantee that Huawei is not left with nothing to depend on, making it more of a strategic investment,” Li said.
China’s National Integrated Circuits Industry Investment Fund, a central government subsidy programme aimed at reducing the country’s reliance on foreign microchips, wants to raise as much as 200 billion yuan (US$32 billion) in its latest round of funding. The first round of about 140 billion yuan was allocated to more than 20 companies, including ZTE.